Business Risks

What’s new in D&O insurance

From cybersecurity to social media and class action litigation: the directors’ and officer’s insurance market is a constantly changing landscape. US industry expert Kevin LaCroix gives his take on the market’s latest developments.


From cybersecurity to social media and class action litigation: the directors’ and officer’s insurance market is a constantly changing landscape. US industry expert Kevin LaCroix gives his take on the market’s latest developments. © orla connolly
Kevin M. LaCroix is an attorney and Executive Vice President, RT ProExec, a division of R-T Specialty, LLC. RT ProExec is an insurance intermediary focused exclusively on management liability issues. Kevin has been involved in directors’ and officers’ (D&O) liability insurance for over 30 years.

Kevin was in Munich to support our Topic Network Casualty Claims event and our recent Global Casualty Claims conference for our clients in Munich. On that occasion, we spoke with Kevin about the latest trends in the US D&O sector.

Why are securities class action trends so important when it comes to D&O risks in the United States?

When you’re talking about serious claims involving companies listed on the US stock market, then the greatest exposure is class action litigation. While that’s been true for a long time, there are a couple of interesting recent developments: although the number of listed companies has declined by around 30% over the last 15 years, the actual number of lawsuits has remained steady. So, it’s likelier today that companies will have a class action lawsuit, but I don’t think that’s something that’s widely understood. There are a number of factors behind this. The most significant is the change in the plaintiffs’ securities litigation bar: there is no longer a single dominant firm and with a greater number of smaller, opportunistic firms, there are a number of younger lawyers coming in, who are very keen to aggressively pursue this kind of litigation.

We are also seeing more securities class action lawsuits in the US against companies based outside of the country. Why do you think this is – is there enough awareness of the risks?

I think most companies are aware the United States is a more litigious environment, but there could be an underestimation of the frequency of this type of lawsuit and also how expensive it can be. I see this particularly among Chinese companies with US-listed stock. They can be very reluctant to buy the requisite insurance needed to protect themselves, which leaves them and their management vulnerable.

How has the rise of global anticorruption efforts affected the D&O claims environment in the United States?

We are seeing more cases filed against foreign companies with US-listed shares as a result of corruption investigations in their home country. This is a relatively new phenomenon, with the driving force often political changes in these respective countries. Take Brazil, for example, which only introduced its anti-corruption law at the beginning of 2014. Now, its largest company – the energy firm Petrobras – has already been hit with numerous class action suits in the United States.

What changes have taken place in the United States in recent years involving mergers and acquisitions-related litigation?

It’s currently very dynamic. For the larger transactions of $100 million and over, with a US-listed target company, almost every transaction now results in a lawsuit. It’s basically become part of the transaction cost. Consequently, it’s led to an increase in the number of D&O lawsuits and has also contributed to the overall loss experience of insurance carriers.

What other developments do carriers have to be wary of in the United States?

There have been significant changes in shareholders’ derivative litigation. In the past, settlements were usually limited to the defendant agreeing to implement corporate governance changes, but we’ve recently seen some very large cash settlements – hundreds of millions of dollars in certain cases. You have to assume there will be more of these large cash settlements and this will have a significant impact on the D&O insurance industry. That’s a severity of loss that just wasn’t a factor before. For the buyers, it has an effect on the amount of insurance they buy, which obviously means more sales opportunities for the insurers. The thing is, I don’t know if the carriers active in the D&O market are fully taking into account that potential level of loss cost coming from that area when they calculate their pricing.

Cybersecurity is a concern at the top of many companies’ agendas. Does it represent a D&O risk?

There’s currently a lot of uncertainty and we’re still in the early stages of seeing what it all means in terms of the number of claims and loss costs. There have been some very high-profile data breaches in recent years, but only a few of them have resulted in lawsuits against senior management, and none in the last year or so. But it would be a mistake to think that means cybersecurity doesn’t represent a significant D&O exposure area. Regulatory action could drive increased claim activity, as regulators become more active in pursing companies that experience breaches. The plaintiffs will follow that. Cybersecurity is an area that will take years to unfold, but, looking forward, I think carriers have to assume that more claims will materialise.

What about social media – could we also see more action here?

So many companies are using it these day to communicate, not only with the world at large, but also investors and potential investors. But tools like Twitter and Facebook come with constraints that can impact disclosure. It wouldn’t surprise me at all to see to see a lawsuit surrounding social media communication misleading investors.